The Productivity Advantages of Large Cities: Distinguishing Agglomeration from Firm Selection
51 Pages Posted: 11 Mar 2009
Date Written: March 2009
Firms are more productive on average in larger cities. Two explanations have been offered: agglomeration economies (larger cities promote interactions that increase productivity) and firm selection (larger cities toughen competition allowing only the most productive to survive). To distinguish between them, we nest a generalised version of a seminal firm selection model and a standard model of agglomeration. Stronger selection in larger cities left-truncates the productivity distribution whereas stronger agglomeration right-shifts and dilates the distribution. We assess the relative importance of agglomeration and firm selection using French establishment-level data and a new quantile approach. Spatial productivity differences in France are mostly explained by agglomeration.
Keywords: agglomeration, cities, firm selection, productivity
JEL Classification: C52, D24, R12
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